Tag Archives: medical inflation

Workers’ Comp Market Trends

Senior executives from some of the top California workers’ compensation carriers identified emerging trends that are of great importance to California employers at the 2015 California Workers’ Compensation and Risk Conference.

Panelists were:

  • Moderator: Pamela Ferrandino, national casualty practice leader at Willis North America
  • Mike Mulray, chief underwriting officer at Everest National
  • John Dickey, regional president at Liberty Mutual
  • Mike Hessling, chief client officer at Gallagher Bassett
  • Glen-Roberts Pitruzzello, vice president of workers’ compensation, group benefits claim strategy and clinical operations, at the Hartford

The WCIRB projects the estimated average medical cost-per-claim will be the lowest since 2007. What do you think are the key drivers behind this improvement?

  • The independent medical review (IMR) process. IMRs are being upheld in favor of the employer – around 90% of the time. That is showing that evidence-based protocols are being followed.
  • Medical inflation has decreased. Effective utilization review (UR) programs have had a positive effect on controlling medical costs.

Will the greater use of generic drugs in the California drug formulary materially lower workers’ compensation costs?

  • Texas is a good example. We have not seen any major pushback from what Texas has done. Texas communicated to the providers, so they know how to work within the new environment. There are reports showing that the new system has been successful.
  • It could help decrease employers’ costs by 10% to 15%. There could be much broader implications to the claimant, as well. It is not just about the money, though; the upside is also the social benefit of avoiding addiction issues.

How do you see medical marijuana affecting employers?

There are three areas:

  1. Intoxication policies come into play when you have an employee using marijuana not related to a workers’ compensation claim.
  2. To date, New Mexico is the only state that ruled for compensable treatment, but the employee was already using marijuana prior to injury. This will likely continue to be challenged in various states.
  3. Medical advocacy will continue to prove effectiveness vs. the alternatives, like opioids.

What insights have you gleaned from predictive modeling?

  • We have had some great success from the claims standpoint. There have been some great advances in tools to help with predictive modeling over the past five to 10 years, like text mining, which allows modelers to look for keywords in cases that show a trend.
  • Predictive modeling can be used to see how to prevent claims from even happening. It is more effective to try to keep the claim from occurring, rather than controlling costs once a claim has occurred.
  • We are using predictive modeling more to drive early intervention in claims to reduce the costs, but we also are trying to see how we can use this information for risk control and reduce claims altogether.
  • Almost all predictive models have a level of false positives. We need to learn to filter out the white noise that is not providing useful information.

Collectively, do you think SB 863 improvements will continue to adhere, or will they be chipped away just like the others?

  • The instant you change the rules, people try to find new loopholes. You cannot stop. One or two years of results is not a trend line to claim a victory. We will probably see erosion, and we will have to come up with solutions as an industry.
  • I’m not sure if we are seeing SB 863 play out as intended, because of issues like IMR and liens. There will probably be tweaking.
  • Many stakeholders are trying to prevent erosion, so there is cautious optimism.

What are trends to look for?

  • Formulary – we could adopt the Texas system, and, while it wouldn’t play out here exactly the same way, I think we need it.
  • Ways to reduce frictional costs for employers, like IMR.
  • The impact of a new president and immigration reform on the workers’ compensation system.
  • Attracting talent for claims adjuster positions.
  • The next generation of workers entering the workforce and becoming injured workers. Engaging with them as injured workers will be vastly different from how we have engaged with workers in the past. They will have different expectations.
  • Changes in the market cycle and how it affects the health of the workers’ comp system.

5 Top Challenges Carriers Face In A Rapidly Changing Industry

Are We In A Hard Market?
According to MarketScout, the average property/casualty rate increased by 5% from 2011 to 2012, with this same upward trend continuing into 2013. And yet, just last week the Council of Insurance Agents & Brokers (CIAB) reported that rate increases in the second quarter did not keep pace with the previous two quarters. CIAB believes the hardening market is moderating. Fitch Ratings also weighed in, noting that the increased premiums in Q1 and Q2 are helping, but they “believe this trend is likely to diminish as strong capital levels and ample underwriting capacity promote market competition.” However, it’s unlikely that short-term price increases will be enough to make up for several years of pricing inadequacy. The reality is that, while carriers are seeing much lower returns on investment income, there is an increase in total surplus dollars relative to total premium. This dynamic makes sustaining a hard market difficult and therefore pricing competition for the best risks continues to be fierce.

From an underwriting perspective, there’s some good news to report as well as mixed results when you look more closely at specific lines of business. Overall, the Property & Casualty market saw improvement in underwriting performance with combined ratios falling to 103.2 in 2012, down from 108 in 2011. Within specific lines of business, workers’ compensation also improved to a combined ratio of 109 in 2012 compared to 115 in 2011. The homeowners market, a historically volatile line with wide performance swings year-to-year, has an average combined ratio of 113 from 2008 to 2011. Bottom line, there’s still more work ahead to make underwriting profitable.

The gains in underwriting performance may signal an intentional focus from carriers to counter the significant losses in investment income. But, making up for these losses is a long-term proposition that cannot be remedied quickly. Recently, the CEO of a global insurer compared declining investment returns to one of the biggest catastrophic weather events. “The lack of investment income continues to be an issue that the industry hasn’t fully addressed,” the CEO said. “We call it ‘the hidden catastrophe,’ equivalent to more than a Katrina-sized hit to profitability every year relative to the long-term baseline.”

Tackling Economic Stagnancy
A sluggish economic recovery affects insurance premiums. For commercial lines carriers, the slow growth in payroll means that overall exposure is not increasing at the same rate as medical inflation. Various estimates put medical inflation in the 4% range for 2012 and payroll growth under 2%. This puts pressure on both claims and underwriting. Underwriting must be more stringent and selective to avoid unnecessary loss on the front end while mitigation strategies need to improve in claims. These new challenges require advanced tools and methodologies that provide real-time information and relevant data in order to reduce the insurer’s risk, and simultaneously generate more profit per policy.

Regulation Woes
According to the 2013 KPMG survey, 60% of executives stated that regulatory and legislative pressures served as the most significant inhibitor of growth in the coming year, a 13% increase from the 2012 survey, and 19% from 2011’s. Contrarily, 59% of executives noted cost as being their primary growth concern in 2011. Healthcare and tax reform are two of the most significant regulatory pressures weighing down on insurers, with over half of those surveyed naming the Affordable Care Act as the most significant individual measure.

The non-renewal of the Terrorism Risk Insurance Act (TRIA) poses a similar challenge, as the probable addition of a terrorism premium to policies will put added pressure on discretionary pricing, especially for the better risks.

“Insurers have experienced a significant shift in the marketplace; in just two years, industry executives have abruptly diverted their attention from pricing concerns to regulatory matters,” said Laura Hay, national leader of KPMG LLP’s insurance practice, as reported in the 2013 KPMG survey. “This turnabout is even more significant when you consider that economic conditions have only slightly improved during this time period, so the combination of these two factors creates an exceptionally challenging market.”

Further to this point, the head of KPMG’s U.S. insurance regulatory group, David Sherwood, added to the survey news saying, “Regulators continue to ask tough questions and regulatory intrusion is set to increase in the coming years. More than ever, regulations and agendas established internationally, in Washington, as well as in local jurisdictions, have as much influence on the industry as market conditions and consumer confidence.”

Data Access & Literacy
Plain and simple: big data helps carriers leverage empirical evidence in their decision-making. Combining data with analytics allows underwriters to take a holistic approach to their craft, which exponentially increases the efficacy of the process.

According to the same KPMG study, only 55% of execs claimed that their company demonstrated advanced data and analytics literacy. That means that just under half of U.S. insurance companies are still not using big data to its full potential, crippling their ability to improve underwriting performance. If the other 45% wants to stay competitive, they need to make analytics a top priority moving forward.

As carriers increase their “data literacy”, they will become more concerned about issues like selection bias. When carriers are limited to a selective or small data sample, it is impossible to draw accurate conclusions. As an example, if a carrier does a great job selecting the best roofing companies to insure and they model future policy performance using only their own data, the analysis will conclude that all roofing companies are good risks. Intuitively we all know that’s not true — it’s a simple example to illustrate the importance of a diverse and large data set when making important business decisions.

Big data is now a board level conversation, and carriers are being asked: “What is your big data strategy?” When that question arises in your meeting, will you have a good answer?

Talent Crisis
Not only do you need advanced data and analytics to meet the financial challenges of the current insurance climate — you need these more sophisticated tools to keep your company competitive in the employment race. In addition to the increases in risk-pricing competition, the competition for the top mindshare of the best agents is increasing substantially. The industry is estimated to have 400,000 positions to fill by 2020, and 20 percent of underwriters will retire in the next few years. This up-and-coming generation of workers expects to be equipped with sophisticated tools and advanced technologies in the workplace. Young people have been raised in a technologically driven world and are inherently tech savvy; the industry must match their technological expectations if we hope to recruit the next generations’ best and brightest. The more technology savvy carriers will be able to use this as a recruiting tool.

Of course, implementing data and analytics across your organization is not something that can be done overnight. Do not be afraid to start small. Whether your company already has some form of predictive analytics in place, or you’re just at the conceptual stage, you can build on early wins to develop measurable results in securing organizational buy-in. Good advice is to start small and build from there — don’t cross your fingers, go all-in and hope for the best. The best advice is to begin now, this is no time to sit back and wait, letting the fast-paced changes in the industry pass you by.

Controlling Workers' Compensation Claim Costs: 3 Things Every Self-Insured Should Know

The observed increase in workers' compensation claim liabilities and ultimate losses is partially attributable to external factors — those outside the control of risk management, such as medical inflation. Elizabeth Bart's article, Ever-Increasing Unpaid Claim Liabilities: When Does The Growth Stop? explores such external factors.

This article also explores the topic of increasing workers' compensation claim costs, with a focus on how claims practices can influence claims costs and contribute to the increasing liabilities, and discusses what self-insureds can do to better manage practices in an effort to control costs.

The management of a workers' compensation claim incorporates several key areas, all of which interact and combine to influence the claim's outcome (e.g., initial handling, investigation, reserving, medical management, etc.). It can be challenging to understand whether a workers' compensation claim is well-managed and whether optimal outcomes are being achieved. This is particularly true for self-insured entities, which often delegate claims management responsibilities to an outside third-party claims administrator (TPA).

The result of using TPAs for claims administration is that the self-insured entity itself maintains little if any expertise in the area of sound claims management practices. Moreover, the TPA will often delegate certain functions to other vendors such as case management and medical and legal bill review, further removing the oversight of these services from the self-insured's reach. Finally, many self-insured/TPA contracts focus on the quick resolution of a large volume of smaller dollar claims, with little consideration for the efforts and resources needed to resolve large claims. Therefore, the management of larger claims may not be well understood or outlined in these arrangements.

Improving three often misunderstood or underestimated claims handling areas could result in a significant improvement in claims outcomes and have a material impact on liabilities:

  • Initial activities
  • Information and data collection
  • Change in case reserving practices

Basic knowledge of these essential claims handling activities will enable the self-insured to effectively work with its TPA to avoid common pitfalls and to proactively manage the TPA. This, in turn, will mitigate or avoid unnecessary cost increases.

Initial Activities
Activities undertaken by the claims handler immediately after a claim is reported are often thought of as administrative tasks — no more than an intake exercise whereby the handler runs through a checklist of scripted questions. These activities include assessing immediate medical management needs, making three-point contact (i.e., contact with the employer, the injured worker, and the medical provider), assigning to the appropriate adjuster, taking statements, and gathering documents (e.g., medical authorizations, photos, police reports, and wage statements).

And in truth, activities that occur in the early stages of a claim may not be terribly significant for the large number of reported workers' compensation claims that resolve quickly. However, for that small percentage of claims upon which the majority of the costs are ultimately expended, proper claims management from the outset is crucial to achieving optimal claims outcomes.

For example, a claimant who has had previous injuries or prior surgeries, or who otherwise presents with certain characteristics such as chronic pain, is more likely to require medical management from the outset to ensure optimal medical outcomes, which in turn reduces costs. For a small number of high-severity claims, if the medical aspects are not understood and well controlled at the outset, the claimant often does not improve and the claim can adversely develop into a larger-than-anticipated and larger-than-necessary claim — a lifetime pain management claim perhaps involving multiple surgeries, and costing hundreds of thousands or even millions of dollars without optimal medical outcome or endpoint for the claimant.

Thus, it is important upon receipt of a claim to investigate all prior injuries, surgeries, prescriptions, and comorbidities (i.e., health issues that are not work-related but nonetheless could impact the treatment of the injury). In many cases, the best practice of making three-point contact has devolved in practice into two-point contact (the employer and the injured worker) and in some cases even one-point contact (the employer). This can leave basic medical questions unanswered for weeks or months. For a small percentage of claims that have the potential for developing into the highest-severity losses, these delays could be critical.

Another key initial activity is adjuster assignment. Assignment to the appropriate adjuster can be particularly important for some claims — for example, those where the claimant reports injuries to nonspecific or multiple body parts, such as “neck, shoulder, arm.” These claims present an element of subjectivity, uncertainty, and potential complexity. It is important that the adjuster thoroughly investigate precisely how the injury occurred and communicate with the medical providers about the types of injuries that can result from that activity.

This means that the adjuster needs to have the proper background and expertise to ask the right questions. If injuries or body parts are reported that are not medically connected to the work-related injury, the adjuster may only have a short period of time within which to deny those unrelated claims. An inexperienced adjuster may not identify or attempt the valid denial, in which case that injury and all subsequent treatment may be deemed accepted for the duration (perhaps for the life of the claimant), with no further opportunity to deny. In a large number of cases, this missed opportunity will not have a significant impact on the outcome, but for that small population of high-severity claims, such an error will be costly.

As a final example, the initial investigation is important to assess the claimant's ability or motivation to return to work based on one or more subtle aspects of the claim, such as educational level, child support status, disability status of the claimant's spouse, ability of the employer to accommodate the claimant's limitations, proximity of claimant's home to job opportunities, or other factors.

It is important for the handler at the outset of the claim to immediately contact the employer, the injured claimant, witnesses, and medical providers to ask pertinent questions. Equally important is the need for the handler to listen carefully to the answers and follow up on unusual or inconsistent information. Inexperienced claim handlers often appear to be following a list of predetermined questions and may hesitate to go “off script.” Many times, the claims that adversely develop are those that, in retrospect, could have been controlled had certain information been collected and had the investigation been thoroughly completed and thoughtfully assessed early in the life of the claim.

Information And Data Collection
Increasing claim costs are also associated with the inability to easily locate and evaluate the information gathered on the file. A claim may be assigned to an adjuster with the appropriate level of expertise, and that adjuster may undertake a prompt and thorough investigation. However, the pertinent information emanating from that investigation is not captured in discrete data fields in one location in the file system. Rather, that information is buried throughout the “notes” section of the claim system — along with numerous immaterial or administrative entries. This impedes the ability of the self-insured to easily identify claims that have the potential to be large and work with the TPA to effectively control costs.

For example, a large volume of the “notes” section of a claim file may include entries such as the date of a reserve review, an adjuster's failed attempt to contact a party, the payment of a bill, the date a processing decision was made, the scanning of a document into the file, or the receipt of a police report with no substantive commentary. Even entries related to the status of a claim — one that on its face would appear to be highly relevant and current — are often simply “copy/pasted” from prior status entries.

Thus, including in the claim notes pertinent information vital to making prompt and reasonable strategic decisions can lead to inefficiencies and suboptimal outcomes. The amount of stale, outdated, repetitive, and sometimes misleading information makes it exceedingly difficult to identify and assess the pertinent facts, issues, and activities in the file, and impedes the adjuster's (and supervisor's) ability to make informed decisions. In many claim operations, reviewing the file is so time-consuming and difficult that the supervisor is only able to randomly select a small sample to audit at regular intervals. If that supervisor does not by chance select the “right” files, important issues might not be identified and key strategic opportunities might be missed.

The problem is compounded when information is entered incorrectly. Common errors can lead to costly repercussions. For example, assume that the medical records all clearly identify a right shoulder injury. If the handler inadvertently references the “left shoulder” injury in the claim notes, all subsequent actions might be based upon that. A supervisor or newly assigned adjuster may not have the time, or may believe it is unnecessary, to confirm that information by checking the original medical records. Body parts and treatments could be implicitly accepted and additional costs expended for injuries that are not work-related.

Similar types of errors can be made with wage information or rate calculations, and can go unnoticed for long periods of time, resulting in costlier claims. Finally, as more and more claims departments are outsourcing medical bill review functions to third-party vendors, some of that key medical information is not captured in the claim system at all, which can also distort the true picture of the potential exposure.

Thus, it is important that the self-insured verify that the TPA, or other claims-handling entity, develops a system of meaningful data capture, whereby key pieces of information are systematically downloaded or manually entered into consistent discrete fields in as few screens as possible. Many claims systems already have these capabilities, but handlers are not required to enter the data and the fields remain blank. Such a data capture would allow representatives at the self-insured entity the ability to obtain a current and comprehensive snapshot of the development on the claim. Discrete data fields also ensure consistency, facilitate fact-checking, and support the creation of meaningful metrics and management information reports. Self-insureds should ensure that they have full access to the claims system and that they understand all the features of that system.

Change In Case Reserving Practices
The onset of conservative case reserving practices can lead to unnecessary increases in ultimate losses. This may not be intuitive. Many people may think that inadequate case reserves lead to increasing ultimate losses, because over time the case reserve (which was initially set “too low”) needs to increase to cover actual payments. While this is true, the ultimate losses may not be affected by the development of inadequate case reserves, because the actuary may have taken the case reserve practices into account in estimating the actuarial reserve.

Thus, even if the case reserves were “too low,” the actuarially estimated additional reserves would have compensated, resulting in a total reserve (case plus actuarial), or “ultimate,” of “just right.” As case reserves increase, actuarial reserves may decrease (all else being equal), and the ultimate will not change. In that way, inadequate case reserves do not necessarily result in increasing ultimate losses.

An important aside: We must remember that inadequate case reserves are not necessarily the result of poor claims handling or intentionally suppressing case reserves. When we say that case reserves are inadequate, we mean that, despite best efforts to set a case reserve that reflects the ultimate value of the claim at any given point in time, there are a few claims that will develop adversely in unanticipated ways (i.e., in ways that could not be foreseen by the claims handler when the prior case reserve was established). That is in part what the actuarial reserve is intended to estimate — the unanticipated development — and is outside the purview of the claims handler.

Changing case reserving practices by making them “higher” or “more conservative,” however, can result in increasing ultimate losses. Consider, hypothetically, a TPA that decides to institute a new practice of establishing a case reserve reflecting the worst case scenario, or adding an arbitrary amount (e.g., 25%) on top of the best estimate of case reserves. That change could result in higher ultimate losses, for two reasons:

  • First, if the actuary is unaware of this change, it will not be incorporated into the actuarial estimates. This could result in higher actuarial estimates. When added to the already increased case reserves, the ultimate losses increase substantially.
  • Second, raising case reserves on a claim can lead to overpayments by the adjuster, a phenomenon commonly referred to as “leakage.” In this case, the additional case reserves are believed, either explicitly or subconsciously, to be available to make payments. Efforts to reduce costs and manage the claim to its optimal result may be tempered by the knowledge that there is “extra” money with which to negotiate. This change in case reserving practices can lead to overpayments and rising claims costs.

In this article, we explored a concept mentioned but not developed in Elizabeth Bart's article, Ever-Increasing Unpaid Claim Liabilities: When Does The Growth Stop? Specifically, we discussed three basic claims practices that could result in increasing workers' compensation costs. Understanding and recognizing the importance of these practices will enable the self-insured to effectively manage the TPA to control increasing costs.